Top 3 Trading Psychology Lessons in 2022


 2022 was a massive year for the financial markets as we likely saw a genuine sea change in the economic environment, monetary policy and investor sentiment.

Here are our top three takeaways from trading this year, which hopefully contributes to becoming better analysts and risk managers in 2023!

Be Mindful of the Market Environment

If you’ve been trading or investing for 10 years or less, then 2022 may have been a shock to you. It was the likely end to more than a decade of low inflation/interest rates and hyper-stimulative central bank monetary policies, which generally benefited long-term holders of risk assets, as well as the “up-only”, “YOLO” market mentality that many traders / investors took.

Holding onto that mentality in 2022 as central banks did a 180 degree turn on monetary policy by hiking interest rates swiftly to battle extreme rates of inflation, you likely got crushed holding onto risk assets like tech equities, crypto assets, and commodities.

Of course, there were exceptions but it was pretty much a bloodbath everywhere, no matter if your asset of choice had great fundamental arguments. And even bond prices were destroyed despite growing global recession fears, falling to the bigger driving narrative that was rising interest rates.

Now, this isn’t a scenario that will happen often enough for traders to strictly prepare for (or will it?), but 2022 was a great reminder that you have to be aware of the larger themes, to be careful when trying to catch market tops or bottoms, and to be mindful of your recency bias as history doesn’t always repeat itself; i.e., buying on the dip isn’t always the best strategy on the table.

Markets Are Dynamic; Be Flexible

For those who recognized the incoming monetary policy tightening scenario early in 2022, or you saw the Ukraine War potentially affecting energy prices and food supplies (thus accelerating inflation rates higher), or you saw the potential differences in potential monetary policy moves between strong and weaker economies, then congratulations and we hope you were able to take profitable action on these theses!

If not, then what happened? Were you not paying attention? Was your strategy not congruent with the market environment? Or was the level of uncertainty on the potential shifts in the financial markets too high for you to take action or change your market biases?

These are the kinds of questions to ask yourself because without answering them, you’ll likely suffer from psychological hurdles that will cloud your decision making. Common hurdles like FOMO (fear of missing out) or sitting deep in a loss could freeze your decision making, like when USD/JPY rallied massively by 30% or when crypto assets collapse more than 60% in 2022.

Doing your homework, preparing plans for different potential scenarios, and limiting your risk are the only solutions for reducing the negative psychological effects of trading.

And if you haven’t done any of these, then it’s okay to wait and trade another day. There’s almost always new opportunities right around the corner, ready for you to take action on when the proper work has been done.

Take Breaks

Managing financial risk can be like joining multiple athletic events at an Olympic level for the mind.

You have to constantly be aware of what’s driving the markets, understanding those movements, making plans for various scenarios, and undergo the psychological gymnastics you will have to endure as the environment changes and your P/L shifts.

For many, this is taxing on both the mind and the body, and doesn’t account for potential additional stressors outside of your trading business, whether it’s family needs, other hustles or whatever else you have going on to weaken the quality of your focus and consistency.

A fatigued mind and body likely means you’re not able to put forth your best effort into your trading business, nor make the best decisions possible when managing risks. That’s when it’s time to drastically reduce risk (or close all positions down altogether) and step away from the markets.

Famous trading psychologist Dr. Brett Steenbrager once said, “By recognizing that burnout is a potential occupational hazard, traders can take a preventive stance by keeping expectations realistic and getting plenty of time away from work, in activities they enjoy and can control.”

So, to prevent the possibility of feeling burned out or overwhelmed, try to incorporate regular, complete breaks (maybe once a quarter or when the markets slow down) from looking at the markets into your trading process.

We know this can be difficult for you hardcore types who don’t even stop thinking about trades on the weekends, but you’ll likely perform better if you do in the same way athletes bounce back from fatigue and injury after a week or two rest.

That’s it for our list this year!

What about you? Any trading psychology insights from 2022?

Don’t hesitate to share your experiences and lessons in the comment section below!